Navigant Research Blog

Just like Bill Belichick famously stated after winning Super Bowl LI last month, EnerNOC appears to be taking “no days off” lately. There has been a series of project wins and partnerships announced in various parts of its business since the beginning of the year. However, the biggest bombshell came during its 2016 annual results earnings call on March 14. CEO Tim Healy revealed that the company has hired advisors and is already in the process of exploring new potential corporate structures such as divestiture of business lines or a full sale of the company.

Let’s start with the most recent positive project news that the company signed a 2-year contract with Taiwan Power Company to provide 200 MW of demand response (DR) as the exclusive provider. Taiwan has experienced very low electricity capacity reserve margins lately, and since it is a densely populated island with an abundance of mountains and rainforest, there is not a lot of land to build new power plants. EnerNOC entered into a joint venture with a local Taiwanese energy services company, Cheng Long Intelligent Engineering, to get quick access to a number of large commercial and industrial customers that are good candidates for DR. When I spoke with EnerNOC President David Brewster, he said that the program compares to other markets in North America and Asia in terms of capacity-based DR, baseline rules, dispatch requirements, and payment rates.

Bigger Picture

Looking at the bigger picture, the company has come to the realization that its corporate structure may not be optimally arranged to maximize shareholder value. On the earnings call, CEO Healy mentioned multiple times that EnerNOC’s business is complex, hard for investors to understand, and prone to market forces outside of its control. The software business had already been restructured last year, but it now appears that a more holistic review is in play.

I would not necessarily say that this news comes as a surprise. I wrote multiple blogs last year about Oracle’s acquisition of Opower and EnerNOC’s restructuring of its software business in which I pondered the ideal business model for DR companies in general, and EnerNOC specifically. Now the truth is out in the open. The possible options include selling off part of the business and remaining a smaller independent entity, being bought out and going private, or being bought by a larger corporation. CEO Healy made it clear on the earnings call that the wheels are already in motion and he expects a quick resolution soon.

Whatever the outcome, I hope the resulting organization is able to maintain its leading position in the DR industry and continue to push for the global expansion of this important grid resource.

2016 started off with a bang for demand response (DR) with last January’s seminal Supreme Court decision on Federal Energy Regulatory Commission (FERC) Order 745. That beginning might have marked the high point for the year in DR, as various events in the regulatory, market, and corporate realms had a mix of positive and negative effects on its overall growth.

Regulatory

Champagne bottles were popped on January 25 in the offices of EnerNOC and other DR companies and advocates after the Supreme Court gave an unexpectedly early and overwhelming 6-2 decision that reversed the US Court of Appeals’ decision on FERC 745 on both parts of the case. The ruling established that DR does fall under FERC’s jurisdiction and that the payment of the full Locational Marginal Price (LMP) in the wholesale energy markets is just and reasonable.

On the market side, wholesale and retail developments affected DR prospects. The annual PJM Base Residual Auction (BRA) price results for the 2019/20 delivery year came in lower than most analysts predicted. There were actually more DR megawatts offered into this auction than the year prior, but fewer megawatts actually cleared, likely due to the reduced price. Only about 6% of DR megawatts cleared as Capacity Performance (CP), with the vast majority clearing as Base Capacity product. With the Base product set to be abolished for the next auction, there is a big question as to how much DR will clear in a CP-only environment.

While there may be no cohesive national energy plan for the United States, several individual states have taken matters into their own hands to modernize the electric grid, with New York and California taking the lead. In both states, utilities held auctions in 2016 to procure distributed energy resources (DER), including DR, to address electric grid needs. California’s investor-owned utilities—Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric—ran the second edition of the state’s Demand Response Auction Mechanism (DRAM). New York took the spotlight in the form of ConEd’s Brooklyn Queens Demand Management (BQDM) auctions in July.

A couple of weeks ago, EnerNOC announced a restructuring, a move which included laying off 200 employees, about 15% of the demand response leader’s workforce. Many of these positions were at its corporate headquarters in Boston. I didn’t want write on the topic until I had a chance to talk directly with the company and get its side of the story, which took a week or so of phone tag to complete. Here’s what I heard and my reaction.

I spoke with Sarah McAuley, senior director of marketing at EnerNOC. She explained that the layoffs were focused on the enterprise software side of the business, and they were cross-functional across sales, operations, and other functions. I have since learned that employees in other parts of the organization that dealt with the software business tangentially were also affected by the restructuring. There were no changes to the senior management team, but changes did extend up to the vice president level. McAuley said that there is nothing else at this scale planned in the near future, but that EnerNOC is taking a close look at how it is operating the business and will continue to optimize resources and shift personnel around the edges.

McAuley also stated that EnerNOC is not retreating from the software business, and the company’s core strategy hasn’t changed. However, its go-to-market path and operational delivery models will be different, focusing on becoming more targeted and lean rather than wide and broad.

Pivot to Software

I remember first hearing about the company’s pivot to software at EnerNOC’s Analyst Day in 2013. At the time, it seemed to me like a risky proposition; EnerNOC is not a software company at heart, and it was an uphill battle against the incumbents to carve out its space in that field.

A similar experience appears to have occurred in the energy efficiency space. EnerNOC made a series of acquisitions over a span of 5 years or so, trying to parlay its demand response position into that adjacent space. All of those deals have since been unwound, presumably at a loss.

It’s important to remember that public companies need to take risks to show constant growth for shareholders. Not all of these are expected to completely succeed, but it appears that few have worked outside of EnerNOC’s core competencies.

Potential Paths Forward

So what’s next? Being the only publicly traded demand response/energy efficiency company left, there are a couple examples of previous outcomes. Comverge, EnerNOC’s closest peer, also went public in the heyday of the economy during the last decade. It only lasted a few years before being bought out and brought private, and it has continued to operate steadily since that time. Opower is the most recent case, having tried the public life for a few years before being acquired by Oracle earlier this year—time will tell how that situation will play out. One of those two scenarios seems plausible for EnerNOC at this point, either going private or being swallowed by a larger corporation (though I am not a financial professional, so don’t take this as investing advice).

In any case, I hope EnerNOC’s passion for and leadership in the demand response field will not be lost. Its tide has truly lifted all boats in the sector, and there is a lot of work left to be done to ensure that it keeps its place in the world’s future low-carbon resource mix.

As I wrote a few weeks ago, May came in like a lion in the demand-side management (DSM) space with some key acquisitions and regulatory happenings. It appears that the month ended with a similar bang, with the PJM auction, EnerNOC’s divestment announcement, and AutoGrid’s investments all stealing headlines.

The annual breath-holding for the PJM Base Residual Auction (BRA) results ended with many sighs, as prices for the 2019/2020 delivery year came in lower than most analysts predicted. At a high level, the PJM load forecast was lower than before, and more generation entered the market than expected, so basic supply and demand ruled the day. Digging into the demand response (DR) and energy efficiency (EE) results, there are a few findings that bear notice. There were actually more DR megawatts offered into this auction than last year, but fewer megawatts cleared, likely due to the reduced price. Only about 6% of DR megawatts cleared as Capacity Performance (CP), with the vast majority clearing as Base Capacity product. The relatively small spread ($20) between the two products may explain this result, but with the Base product set to be abolished for the next auction, there is a big question as to how much DR will clear in a CP-only environment next year.

Meanwhile, about 66% of EE cleared as CP, showing a more-certain future for EE. There is still an open question regarding summer-based DR and EE (and renewable) resources, which PJM is undertaking a stakeholder process to address. Finally, in a quirk in the auction mechanics, the price for DR and EE in the Pepco zone cleared at $0.01 due to a constraint on the amount of DR and EE that can be procured in a given zone. This likely means that the DR megawatts that cleared in that zone were mostly utility program megawatts bid in as price-takers.

Investments and Divestments

In other news, EnerNOC announced that it was ready to divest its acquisition of Pulse Energy’s utility customer engagement business from a couple of years ago, essentially laying off 5% of its North American workforce. The company still feels that the business has value and growth potential, but it doesn’t fit EnerNOC’s focus on enterprise software rather than utility services. Furthermore, the long sales and decision cycles for utilities may not be a good fit for a growth-focused company, as witnessed by the recent Oracle-Opower deal.

Finally, AutoGrid, a DR management system and data analytics vendor, announced a new $20 million investment led by Energy Impact Partners (EIP). EIP is a consortium of utilities Southern Company, Xcel Energy, Oncor, and National Grid. These companies aren’t necessarily utilizing AutoGrid’s software at this point, but this commitment signals that utilities see the need to be in front of the transformative nature of data and analytics for their business models.

It will be hard for June to top this whirlwind of activity, but we’ll stay on the lookout for more news and developments from the DSM world.